Lifting the Veil of Incorporation
The concept of a company being a legal entity can sometimes give undesirable results. In particular, shareholders could use a company to obtain funds dishonestly, and then not be liable for repayment.
There are therefore numerous exceptions to the rules defined by Salomon v Salomon & Co Ltd. These can be implemented by the courts on a case-by-case basis, or by statute.
A company once incorporated becomes a legal personality, a juristic entity, separate and distinct from its members and shareholders and capable of having its own rights, duties and obligation and can sue or be sued in its own name.
It is also proving that a corporation exists merely as a completely controlled front (alter ego) for an individual or management group, so that in a lawsuit the individual defendants can be held responsible (liable) for damages for actions of the corporation. If a corporation has issued stock and held regular meetings of shareholders and directors, it is unlikely a judge will "pierce" the veil and limit the liability to the corporation, unless there is proof that the corporation was created to accomplish a fraud on those dealing with it.
Exceptions implemented by statute
The Companies Act 1985 includes a number of exceptions to the general rule
imposed by Salomon v Salomon & Co Ltd.
1) A public company must have at least two members. If there is a single
member (who is aware he is the only member) for more that six months,
he is personally liable for any debts incurred during that period.
2) Groups of companies must produce accounts acknowledging their
internal relationship, and profits and losses of different subsidiaries can
be offset for taxation purposes.
3) Under the Transfer of Earnings and Protection of Employment
Regulations (XXX), if an employee transfers from one company to a
sister company, their period o employment is held to be continuous.
4) Employees of a company can be liable for the company’s actions in
some circumstances:
- A public company must have an s117 certificate. If it operates
without one, a director may be personally liable for any debts
incurred.
- A company cheque must bear the name of a company exactly,
otherwise the director who signs is liable if the cheque is not cleared.
This applies even if the omission is due to a printing error. A
director of Michael Jackson Ltd was personally liable for a cheque
he signed bearing the company name M Jackson Ltd.
- If a company is wound up, its director may not carry out similar
business with a similar name for five years. Double glazing
companies are a good example of this; before his legislation,
directors would pay themselves high bonuses and run a company
into the ground, then would buy the assets of the insolvent company
cheaply and set up a virtually identical company with a similar name
to transfer any goodwill.
- Under the Company Directors Disqualification Act 1986, a person
who is disqualified from being a director can be personally liable if
they act as a director during their disqualification period.
- If directors know a company is close to insolvency but continue
trading, they may be personally liable. For example, Courts
Furniture Ltd recently continued taking orders and deposits despite
the directors knowing the business was close to closing.
Wednesday, April 21, 2010
Corporation / Company
A corporation is defined as a legal entity or structure created under the authority of the laws of a state, consisting of a person or group of persons who become shareholders. The entity's existence is considered separate and distinct from that of its members.
Like a real person, a corporation can enter into contracts, sue and be sued, pay taxes separately from its owners, and do the other things necessary to conduct business. Since a corporation is an entity in its own right, it is liable for its own debts and obligations. As a result, providing that corporate formalities are followed, the corporation's owners (the shareholders) enjoy limited liability, and are legally shielded from the corporation's liabilities and debts.
The existence of a corporation is not dependent upon who the owners or investors are at any one time. Once formed, a corporation continues to exist as a separate entity, even when shareholders die or sell their shares. A corporation continues to exist until the shareholders decide to dissolve it or merge it with another business.
Corporations are subject to the laws of the state of incorporation, and to the laws of any other state in which the corporation conducts business. Corporations may thus be subject to the laws of more than one state. All states have corporation statutes that set forth the ground rules as to how corporations are formed and maintained.
In the eyes of the law, a corporation has many of the same rights and responsibilities as a person. It may buy, sell, and own property; enter into leases and contracts; and bring lawsuits. It pays taxes. It can be prosecuted and punished (often with fines) if it violates the law. The chief advantages are that it can exist indefinitely, beyond the lifetime of any one member or founder, and that it offers its owners the protection of limited personal liability.
Limited Liability
If you own shares in a corporation that cannot pay its debts and is sued by its creditors, the assets of the company may be seized and sold. But although you can lose your investment, the creditors cannot attach your personal assets (such as cars, houses, or bank accounts) to satisfy their claims.
There are some important exceptions to this rule, however. If the business affairs of a corporation and its shareholders are so entangled that they are, in effect, one and the same, an opponent in a lawsuit may be able to convince a court to "pierce the corporate veil" and impose personal liability, or responsibility, on the active shareholders. Personal liability may also be imposed if the corporation does not comply with required legal formalities or fails to keep proper records.
Like a real person, a corporation can enter into contracts, sue and be sued, pay taxes separately from its owners, and do the other things necessary to conduct business. Since a corporation is an entity in its own right, it is liable for its own debts and obligations. As a result, providing that corporate formalities are followed, the corporation's owners (the shareholders) enjoy limited liability, and are legally shielded from the corporation's liabilities and debts.
The existence of a corporation is not dependent upon who the owners or investors are at any one time. Once formed, a corporation continues to exist as a separate entity, even when shareholders die or sell their shares. A corporation continues to exist until the shareholders decide to dissolve it or merge it with another business.
Corporations are subject to the laws of the state of incorporation, and to the laws of any other state in which the corporation conducts business. Corporations may thus be subject to the laws of more than one state. All states have corporation statutes that set forth the ground rules as to how corporations are formed and maintained.
In the eyes of the law, a corporation has many of the same rights and responsibilities as a person. It may buy, sell, and own property; enter into leases and contracts; and bring lawsuits. It pays taxes. It can be prosecuted and punished (often with fines) if it violates the law. The chief advantages are that it can exist indefinitely, beyond the lifetime of any one member or founder, and that it offers its owners the protection of limited personal liability.
Limited Liability
If you own shares in a corporation that cannot pay its debts and is sued by its creditors, the assets of the company may be seized and sold. But although you can lose your investment, the creditors cannot attach your personal assets (such as cars, houses, or bank accounts) to satisfy their claims.
There are some important exceptions to this rule, however. If the business affairs of a corporation and its shareholders are so entangled that they are, in effect, one and the same, an opponent in a lawsuit may be able to convince a court to "pierce the corporate veil" and impose personal liability, or responsibility, on the active shareholders. Personal liability may also be imposed if the corporation does not comply with required legal formalities or fails to keep proper records.
Types of Business Organizations
Sole proprietorship is the simplest form of business organisation. It is owned by one person, but it need not be operated by that person alone. A sole proprietorship can even have large numbers of employees.
There are advantages and limitations of running a Sole Proprietorship type of business. Do carefully study the legal implications of the pros and cons before deciding the best option.
Advantages of Sole Proprietorship
- As a sole proprietor, you have absolute freedom in decision making.
- All profits will be your personal property.
- No reports of accounts are required.
- You only need to pay personal income tax and not business tax.
Limitations of sole proprietorship
- You are responsible for the debts and risks of the business.
- Legally, there is no difference between your personal and your business property. - Your liabilities are unlimited, whicn means risks and failures in the business will involve your personal property.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.
A partnership is also a type of business entity in which partners (owners) share with each other the profits or losses of the business. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.
Corporation is the most common form of business organization, and one which is chartered by a state and given many legal rights as an entity separate from its owners. This form of business is characterized by the limited liability of its owners, the issuance of shares of easily transferable stock, and existence as a going concern. The process of becoming a corporation, call incorporation, gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued (a condition known as limited liability). Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations, although these can be both advantageous and disadvantageous. In these respects, corporations differ from sole proprietorships and limited partnerships.
There are advantages and limitations of running a Sole Proprietorship type of business. Do carefully study the legal implications of the pros and cons before deciding the best option.
Advantages of Sole Proprietorship
- As a sole proprietor, you have absolute freedom in decision making.
- All profits will be your personal property.
- No reports of accounts are required.
- You only need to pay personal income tax and not business tax.
Limitations of sole proprietorship
- You are responsible for the debts and risks of the business.
- Legally, there is no difference between your personal and your business property. - Your liabilities are unlimited, whicn means risks and failures in the business will involve your personal property.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.
A partnership is also a type of business entity in which partners (owners) share with each other the profits or losses of the business. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.
Corporation is the most common form of business organization, and one which is chartered by a state and given many legal rights as an entity separate from its owners. This form of business is characterized by the limited liability of its owners, the issuance of shares of easily transferable stock, and existence as a going concern. The process of becoming a corporation, call incorporation, gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued (a condition known as limited liability). Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations, although these can be both advantageous and disadvantageous. In these respects, corporations differ from sole proprietorships and limited partnerships.
Offer
Offer and acceptance analysis is a traditional approach in contract law used to determine whether an agreement exists between two parties. As a contract is an agreement, an offer is an indication by one person (the "offeror") to another (the "offeree") of the offeror's willingness to enter into a contract on certain terms without further negotiations. A contract is said to come into existence when acceptance of an offer (agreement to the terms in it) has been communicated to the offeror by the offeree.
From Wikipedia, the offer and acceptance formula, developed in the 19th century, identifies a moment of formation when the parties are of one mind. This classical approach to contract formation has been weakened by developments in the law of estoppel, misleading conduct, misrepresentation and unjust enrichment.
Offer as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed", the "offeree". An offer is a statement of the terms on which the offeror is willing to be bound.
Whether two parties have an agreement or a valid offer is an issue which is determined by the court using the Objective test (Smith v. Hughes). Therefore the "intention" referred to in the definition is objectively judged by the courts. In the English case of Smith v. Hughes the court emphasised that the important thing is not a party's real intentions but how a reasonable person would view the situation. This is due mainly to common sense as each party would not wish to breach his side of the contract if it would make him or her culpable to damages, it would especially be contrary to the principle of certainty and clarity in commercial contract and the topic of mistake and how it affects the contract. As a minimum requirement the conditions for an offer should include at least the following 4 conditions: Delivery date, price, terms of payment that includes the date of payment and detail description of the item on offer including a fair description of the condition or type of service. Without one of the minimum requirements of condition an offer of sale is not seen as a legal offer but rather seen as an advertisement.
From Wikipedia, the offer and acceptance formula, developed in the 19th century, identifies a moment of formation when the parties are of one mind. This classical approach to contract formation has been weakened by developments in the law of estoppel, misleading conduct, misrepresentation and unjust enrichment.
Offer as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed", the "offeree". An offer is a statement of the terms on which the offeror is willing to be bound.
Whether two parties have an agreement or a valid offer is an issue which is determined by the court using the Objective test (Smith v. Hughes). Therefore the "intention" referred to in the definition is objectively judged by the courts. In the English case of Smith v. Hughes the court emphasised that the important thing is not a party's real intentions but how a reasonable person would view the situation. This is due mainly to common sense as each party would not wish to breach his side of the contract if it would make him or her culpable to damages, it would especially be contrary to the principle of certainty and clarity in commercial contract and the topic of mistake and how it affects the contract. As a minimum requirement the conditions for an offer should include at least the following 4 conditions: Delivery date, price, terms of payment that includes the date of payment and detail description of the item on offer including a fair description of the condition or type of service. Without one of the minimum requirements of condition an offer of sale is not seen as a legal offer but rather seen as an advertisement.
Contract
In law, a contract is a binding legal agreement that is enforceable in a court of law or by binding arbitration. That is to say, a contract is an exchange of promises with a specific remedy for breach.
Agreement is said to be reached when an offer capable of immediate acceptance is met with a "mirror image" acceptance (i.e., an unqualified acceptance). The parties must have the necessary capacity to contract and the contract must not be either trifling, indeterminate, impossible, or illegal. Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda (usually literally "agreements are to be kept"). Breach of contract is recognized by the law and remedies can be provided.
As long as the good or service provided is legal, any oral agreement between two parties can constitute a binding legal contract. The practical limitation to this, however, is that only parties to a written agreement have material evidence (the written contract itself) to prove the actual terms uttered at the time the agreement was struck. In daily life, most contracts can be and are made orally, such as purchasing a book or a sandwich. Sometimes written contracts are required by either the parties, or by statutory law within various jurisdiction for certain types of agreement, for example when buying a house or land.
Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations (along with tort, unjust enrichment or restitution).
According to legal scholar Sir John William Salmond, a contract is "an agreement creating and defining the obligations between two or more parties".
As a means of economic ordering, contract relies on the notion of consensual exchange and has been extensively discussed in broader economic, sociological and anthropological terms (see "Contractual theory", below). In American English, the term extends beyond the legal meaning to encompass a broader category of agreements. (Wikipedia)
Agreement is said to be reached when an offer capable of immediate acceptance is met with a "mirror image" acceptance (i.e., an unqualified acceptance). The parties must have the necessary capacity to contract and the contract must not be either trifling, indeterminate, impossible, or illegal. Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda (usually literally "agreements are to be kept"). Breach of contract is recognized by the law and remedies can be provided.
As long as the good or service provided is legal, any oral agreement between two parties can constitute a binding legal contract. The practical limitation to this, however, is that only parties to a written agreement have material evidence (the written contract itself) to prove the actual terms uttered at the time the agreement was struck. In daily life, most contracts can be and are made orally, such as purchasing a book or a sandwich. Sometimes written contracts are required by either the parties, or by statutory law within various jurisdiction for certain types of agreement, for example when buying a house or land.
Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations (along with tort, unjust enrichment or restitution).
According to legal scholar Sir John William Salmond, a contract is "an agreement creating and defining the obligations between two or more parties".
As a means of economic ordering, contract relies on the notion of consensual exchange and has been extensively discussed in broader economic, sociological and anthropological terms (see "Contractual theory", below). In American English, the term extends beyond the legal meaning to encompass a broader category of agreements. (Wikipedia)
Validity of a Contract
When you start a business, you can expect to be signing contracts with different parties for the duration of your operation. This is a very risky part of business, but is also a very normal part of it.
The only way to protect yourself is to determine the validity of a preferred contract before you sign and make a commitment.
As a business owner, one thing that you will constantly deal with is a contract. Whenever you do business, you and your partners will always enter into contracts. In fact, the mere action of incorporating a corporation or partnership requires people to sign and notarize a contract as a sign of good faith and to show that the venture is legal.
Because of its importance, businessmen go to great lengths and take some time to determine the validity of a contract. In business, just because you are extended a contract it doesn’t mean that you should sign it already. You should look into its terms and provisions first to see if you will not run into problems later on after signing that piece of paper and finalizing the deal.
The requirements for the contract to be valid are actually very simple. Here are the points that you should look for when a contract is offered to you in relation to your business:
The parties to the contract should be clearly defined
This part is important since it shows who are bound by the terms and provisions of the offered contract. The parties listed in a contract are the ones that reserve the right to do something under the contract.
The most common example is the Terms and Agreements statement that most users are required to read when joining a website. In this case, the parties here are the users and the owners of the website. If you do take the time to read it, you’ll find that there is a provision in every TOS stating that the website reserves the right to terminate the membership given certain circumstances.
There is a clear object of the contract
The object is the item for which the contract has been formulated. It doesn’t even have to be a tangible commodity; as long as there is something defined in exchange for your part of the contract, then that qualifies as the object of the agreement. The object of the agreement should also be legal, otherwise you will have trouble suing the other party later on if a breach is committed.
For example, you are running an advertising firm and someone approaches you with an offer of a marketing partnership. The contract offers you a fixed fee in exchange for your company undertaking the marketing campaign for their product. In this sample scenario, which is the object of the contract? No, it is not the product but rather the advertising services that you are to extend on their behalf.
The only way to protect yourself is to determine the validity of a preferred contract before you sign and make a commitment.
As a business owner, one thing that you will constantly deal with is a contract. Whenever you do business, you and your partners will always enter into contracts. In fact, the mere action of incorporating a corporation or partnership requires people to sign and notarize a contract as a sign of good faith and to show that the venture is legal.
Because of its importance, businessmen go to great lengths and take some time to determine the validity of a contract. In business, just because you are extended a contract it doesn’t mean that you should sign it already. You should look into its terms and provisions first to see if you will not run into problems later on after signing that piece of paper and finalizing the deal.
The requirements for the contract to be valid are actually very simple. Here are the points that you should look for when a contract is offered to you in relation to your business:
The parties to the contract should be clearly defined
This part is important since it shows who are bound by the terms and provisions of the offered contract. The parties listed in a contract are the ones that reserve the right to do something under the contract.
The most common example is the Terms and Agreements statement that most users are required to read when joining a website. In this case, the parties here are the users and the owners of the website. If you do take the time to read it, you’ll find that there is a provision in every TOS stating that the website reserves the right to terminate the membership given certain circumstances.
There is a clear object of the contract
The object is the item for which the contract has been formulated. It doesn’t even have to be a tangible commodity; as long as there is something defined in exchange for your part of the contract, then that qualifies as the object of the agreement. The object of the agreement should also be legal, otherwise you will have trouble suing the other party later on if a breach is committed.
For example, you are running an advertising firm and someone approaches you with an offer of a marketing partnership. The contract offers you a fixed fee in exchange for your company undertaking the marketing campaign for their product. In this sample scenario, which is the object of the contract? No, it is not the product but rather the advertising services that you are to extend on their behalf.
Tuesday, April 13, 2010
One day, Jay saw a banner hanging in front of her favorite cassette outlet in Alamanda which reads: "BIG SALE! LATEST TOO PHAT'S ALBUM IS UP FOR GRAB WITH 50% DISCOUNT! LIMITED STOCK! HURRY, HURRY, HURRY!" After reading it, Jay immediately jumped in the outlet and said she wanted that album at the said discounted price. But to her disappointment, the shop owner said that the cassette is now sold at normal price. Can Jay sue the shop owner for breach of contract? Discuss according to Contracts Act 1950 and relevant decided case(s).
Jay cannot sue the shop owner for the breach of contract as there is an invitation to offer. It is just an invitation to make an offer on the sale of the products. It is a sort of preliminary negotiation to buy something. Examples include the goods displayed in the shop with price tag, advertisement in the newspaper, and Auction sale and Tender.
Similar case is "Pharmaceutical Society of Great Britain v. Boots Cash Chemist"
Fact: The defendant was prosecuted for selling drugs (poison) without the presence of a qualified pharmacist. The customer selected the drug and put in the basket and has not paid yet to the cashier.
Held: Displaying of medicine in the pharmacy is merely an invitation to treat and not offer. When the customers put the goods in the basket, they offer to buy them and the sale will take place at the cashier’s desk if the cashier accepts the price.
Jay cannot sue the shop owner for the breach of contract as there is an invitation to offer. It is just an invitation to make an offer on the sale of the products. It is a sort of preliminary negotiation to buy something. Examples include the goods displayed in the shop with price tag, advertisement in the newspaper, and Auction sale and Tender.
Similar case is "Pharmaceutical Society of Great Britain v. Boots Cash Chemist"
Fact: The defendant was prosecuted for selling drugs (poison) without the presence of a qualified pharmacist. The customer selected the drug and put in the basket and has not paid yet to the cashier.
Held: Displaying of medicine in the pharmacy is merely an invitation to treat and not offer. When the customers put the goods in the basket, they offer to buy them and the sale will take place at the cashier’s desk if the cashier accepts the price.
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